Bilateral Investment: Growing, but Smaller Than It Should Be

Stephanie Henry

Chinese investment in the United States reached nearly $1.4 billion in the first quarter of 2014, according to new estimates released by Rhodium Group.  Though overall investment slowed from Q1 2013, the number of M&A transactions hit a new high for the quarter—18 in total. In the first quarter, leading sectors for M&A and greenfield investments included auto and aviation, entertainment, real estate, and information technology. Rhodium predicts that 2014 will be a strong year for investment, as firms have announced nearly $8 billion in new deals expected to close in 2014.

Increasing investment in both countries

Though American companies have been investing in China for more than three decades, Chinese investment in the United States has only begun to rise significantly in recent years. Despite recent gains, however, bilateral investment in both markets is still only a small fraction of total foreign investment in the United States and China. According to the US Bureau of Economic Analysis, which uses different definitions and accounting than Rhodium to track investment, cumulative Chinese investment in the United States totaled $5.2 billion in 2012. That amounts to a less than 1 percent share of total foreign investment in the US market, on par with Austria and India’s investments for the same year. Comparatively, in 2012 the United Kingdom’s investments in the United States represented an 18.4 percent share of investment, while Japan and the Netherlands represented 11.6 and 10.4 percent, respectively.

Similarly, US investment in China makes up a small portion of foreign investment in China, although Chinese statistics likely undercount American investment. According to data from China’s Ministry of Commerce (MOFCOM), new US investments in China in 2013 reached $3.4 billion, or about 3 percent of total utilized foreign investment. However, MOFCOM’s data do not include reinvested earnings or capital contributions from US companies’ subsidiaries abroad, which the US-China Business Council (USCBC) believes could undercount US investment in China by 25-50 percent. 

Opportunity for future growth

USCBC believes the small share of US investment in China is also due to market restrictions. While companies from other countries, like Japan, Singapore, and Taiwan, have significant investments in China, a large share of those projects is focused on export-directed ventures. Comparatively, American companies tend to invest in China to reach the Chinese market and have been inhibited by foreign ownership restrictions in many manufacturing and services sectors. That makes opportunities like the US-China Bilateral Investment Treaty (BIT) negotiations an appealing initiative to help break down barriers in China’s market.

The United States and China have held 12 rounds of negotiation on a BIT, which would give both parties an opportunity to expand investment in the other’s market. Negotiations have so far focused on the commitments in the United States’ Model BIT, which was revised in 2012 and is used as a basis for negotiations. The United States and China will begin considering each country’s negative list proposals once the text reviews are completed. The “negative list” is a list of sectors that would remain closed to foreign investment.

As negotiations progress, USCBC will continue its outreach and educational efforts on the BIT. USCBC has already begun organizing regular briefings with congressional staff on US-China trade and commercial relations, and will continue these educational programs throughout the year. USCBC President John Frisbie penned an op-ed on why BIT negotiations should be prioritized. USCBC is also developing materials to be used to brief government and industry on the BIT. Further details on these will be forthcoming.